Wall Street ended its worst week in two years on Friday with another sharp fall as markets in Europe also continued to tumble from the record-high levels reached less than a month ago.

Investors headed for the exits amid growing fears over a bond market rout, triggered by early signs of inflation in the US as economic growth accelerates and wages appear to finally be rising after years of stagnation. US government bond yields, which rise as prices fall, hit the highest level since January 2014.

The Dow Jones Industrial Average fell 665 points to end the day down more than 2.5% and falling below 26,000, the record level it hit on 17 January. The sell-off came after the US labor department released a better than expected monthly jobs report, sparking fears of a sharper rise in interest rates. It was the first time since June 2016 that the Dow had fallen more than 500 points.

Amid a widespread sell-off, the biggest fallers were Apple, Visa and oil firms Exxon and Chevron.

In Europe, the FTSE 100 recorded its worst week since April last year when Theresa May called the snap election, dropping by 47 points to 7,443, while Germany’s Dax fell 1.7%.

The worst week for stocks under Donald Trump comes after one of the best years in history for shares in 2017 and just a week after the Dow hit a record high of 26,617.

Some investors called the tail-end of the bull market a “melt-up” – with US shares continuing to rise despite looking overpriced by traditional yardsticks, warning it was a last hurrah before a downward correction or crash.

The latest sell-off comes amid stronger signals for the health of the global economy, which investors fear could fuel higher levels of inflation that would prompt central banks to raise interest rates. Investors said the drop could be a sign of the market returning to more typical periods of peaks and troughs after abnormally calm conditions last year.

Ken Odeluga, market analyst at City Index, said: “As one of the best-ever Januarys for US equities ends in an upsurge of volatility, the beginning of February threatens to bring edgier conditions than investors have grown accustomed to.”

Figures from the US job market on Friday showed wages rising at the fastest annual rate since 2009, as the American economy created 200,000 new jobs last month – a better performance than had been expected by economists. Improving levels of pay could lead companies to hike their prices to compensate for higher wage bills – leading to an inflationary spiral.

Analysts said the Federal Reserve now looks increasingly likely to raise interest rates next month when its panel of rate-setters meets for the first time under new chairman Jerome Powell. “It is hard to argue against a March Fed rate hike now,” said James Knightley, chief international economist at ING Bank.

The stronger picture for economic growth in the US also triggered a rally for the dollar on international exchanges, with the pound falling by about 1% against the American currency.

Despite the warning signals flashing for global stock markets, economists said the drop in equity prices may be a short-term trend if the world economy can continue to expand without generating too much inflation and if central banks do not hike interest rates more than anticipated.

But a number of risks lurk in the background, including rising tensions over trade between the Trump White House and the rest of the world, or the re-emergence of geopolitical tensions or from rising indebtedness in China.